UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
For the quarterly period ended October 2, 2010
OR
For the transition period from to
Commission file number 1-4171
KELLOGG COMPANY
One Kellogg Square, P.O. Box 3599, Battle Creek, MI 49016-3599
Registrant’s telephone number: 269-961-2000
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
Common Stock outstanding as of October 30, 2010 — 368,213,884 shares
INDEX
PART I — Financial Information
Item 1:
Financial Statements
Consolidated Balance Sheet — October 2, 2010 and January 2, 2010
Consolidated Statement of Income — quarter and year-to-date periods ended October 2, 2010 and October 3, 2009
Consolidated Statement of Equity — year ended January 2, 2010 and year-to-date period ended October 2, 2010
Consolidated Statement of Cash Flows — year-to-date periods ended October 2, 2010 and October 3, 2009
Notes to Consolidated Financial Statements
Item 2:
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3:
Quantitative and Qualitative Disclosures about Market Risk
Item 4:
Controls and Procedures
PART II — Other Information
Item 1A:
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6:
Exhibits
Signatures
Exhibit Index
Rule 13a-14(e)/15d-14(a) Certification from A. D. David Mackay
Rule 13a-14(e)/15d-14(a) Certification from Ronald L. Dissinger
Section 1350 Certification from A. D. David Mackay
Section 1350 Certification from Ronald L. Dissinger
Part I – FINANCIAL INFORMATION
Item 1. Financial Statements.
Kellogg Company and Subsidiaries
CONSOLIDATED BALANCE SHEET
(millions, except per share data)
January 2,2010
*
Current assets
Cash and cash equivalents
Accounts receivable, net
Inventories:
Raw materials and supplies
Finished goods and materials in process
Deferred income taxes
Other prepaid assets
Total current assets
Property, net of accumulated depreciation of $4,666 and $4,520
Goodwill
Other intangibles, net of accumulated amortization of $46 and $45
Pension
Other assets
Total assets
Current liabilities
Current maturities of long-term debt
Notes payable
Accounts payable
Accrued advertising and promotion
Accrued income taxes
Accrued salaries and wages
Other current liabilities
Total current liabilities
Long-term debt
Pension liability
Other liabilities
Commitments and contingencies
Equity
Common stock, $.25 par value
Capital in excess of par value
Retained earnings
Treasury stock, at cost
Accumulated other comprehensive income (loss)
Total Kellogg Company equity
Noncontrolling interests
Total equity
Total liabilities and equity
* Condensed from audited financial statements.
Refer to Notes to Consolidated Financial Statements.
2
CONSOLIDATED STATEMENT OF INCOME
Net sales
Cost of goods sold
Selling, general and administrative expense
Operating profit
Interest expense
Other income (expense), net
Income before income taxes
Income taxes
Earnings (loss) from joint ventures
Net income
Net income (loss) attributable to noncontrolling interests
Net income attributable to Kellogg Company
Per share amounts:
Basic
Diluted
Dividends per share
Average shares outstanding:
Actual shares outstanding at period end
3
CONSOLIDATED STATEMENT OF EQUITY
(millions)
Capital inexcess of
par value
Retainedearnings
Non-
controllinginterests
Totalequity
Totalcomprehensiveincome (loss)
Balance, January 3, 2009
Common stock repurchases
Net income (loss)
Dividends
Other comprehensive income
Stock compensation
Stock options exercised and other
Balance, January 2, 2010
Other comprehensive income (loss)
Balance, October 2, 2010
4
CONSOLIDATED STATEMENT OF CASH FLOWS
Operating activities
Adjustments to reconcile net income to operating cash flows:
Depreciation and amortization
Other
Postretirement benefit plan contributions
Changes in operating assets and liabilities:
Trade receivables
Inventories
Accrued interest expense
Accrued and prepaid advertising, promotion and trade allowances
All other current assets and liabilities
Net cash provided by operating activities
Investing activities
Additions to properties
Net cash used in investing activities
Financing activities
Net issuances (reductions) of notes payable
Issuances of long-term debt
Reductions of long-term debt
Net issuances of common stock
Cash dividends
Net cash used in financing activities
Effect of exchange rate changes on cash and cash equivalents
Increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
5
for the quarter ended October 2, 2010 (unaudited)
Note 1 Accounting policies
Basis of presentation
The unaudited interim financial information of Kellogg Company (the Company) included in this report reflects normal recurring adjustments that management believes are necessary for a fair statement of the results of operations, financial position, equity and cash flows for the periods presented. This interim information should be read in conjunction with the financial statements and accompanying notes contained on pages 27 to 56 of the Company’s 2009 Annual Report on Form 10-K.
The condensed balance sheet data at January 2, 2010 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. The results of operations for the quarterly period ended October 2, 2010 are not necessarily indicative of the results to be expected for other interim periods or the full year.
New accounting standard
In December 2009, the FASB amended the Accounting Standards Codification related to the consolidation provisions that apply to variable interest entities. This guidance is effective for fiscal years that begin after November 15, 2009 and was adopted by the Company on a prospective basis as of January 3, 2010 without material impact to its consolidated financial statements.
Note 2 Goodwill and other intangible assets
Changes in the carrying amount of goodwill for the year-to-date period ended October 2, 2010 are presented in the following table. Certain of the Company’s goodwill balances are subject to foreign currency translation adjustments. Fluctuations in exchange rates contributed to the change in goodwill balance for the period.
Carrying amount of goodwill
January 2, 2010
Currency translation adjustment
October 2, 2010
(a) Includes Australia, Asia and South Africa.
Intangible assets subject to amortization
Trademarks
Total
For intangible assets in the preceding table, amortization was less than $1 million for each of the current and prior year comparable quarters. The currently estimated aggregate annual amortization expense for full-year 2010 and each of the four succeeding fiscal years is approximately $2 million.
Intangible assets not subject to amortization
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Note 3 Exit or disposal activities
The Company views its continued spending on cost-reduction activities as part of its ongoing operating principles to provide greater visibility in achieving its long-term profit growth targets. Initiatives undertaken are currently expected to recover cash implementation costs within a five-year period of completion. Upon completion (or as each major stage is completed in the case of multi-year programs), the project begins to deliver cash savings and/or reduced depreciation.
2010 activities
During the third quarter of 2010, the Company incurred exit costs related to two ongoing programs which will result in cost of goods sold (COGS) and selling, general and administrative (SGA) expense savings. The COGS program relates to Kellogg’s lean, efficient, and agile network (K LEAN). The SGA programs focus on the efficiency and effectiveness of various support functions.
Total charges incurred during the quarter and year-to-date periods ended October 2, 2010 were as follows:
Employee severance
Other cash costs (a)
Retirement benefits (b)
Total program costs incurred through October 2, 2010 were as follows:
In 2009, the Company commenced K LEAN. Refer to page 35 of the Company’s 2009 Annual Report on Form 10-K for further information on this initiative. Based on forecasted foreign exchange rates, the Company currently expects to incur $35 million in total exit costs; $27 million has been incurred to date which represents employee severance and other cash costs associated with the elimination of hourly and salaried positions at various global manufacturing facilities. Costs for this program impacted the following operating segments for the quarter and year-to-date periods ended October 2, 2010 and October 3, 2009 as follows:
North America
Europe
Asia Pacific (a)
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In 2009, the Company commenced various SGA programs which will result in an improvement in the efficiency and effectiveness of various support functions. Refer to page 35 of the Company’s 2009 Annual Report on Form 10-K for further information on this initiative. Based on forecasted foreign exchange rates, the Company currently expects to incur $40 million in total exit costs; $38 million has been incurred to date which represents severance and other cash costs associated with the elimination of salaried positions. These programs are expected to be substantially complete by the end of 2010. Costs for these programs impacted the following operating segments for the quarter and year-to-date periods ended October 2, 2010 and October 3, 2009 as follows:
Reserves for the COGS and SGA programs are primarily for employee severance and will be paid out by the end of 2010. The detail is as follows:
COGS program
SGA programs
Manufacturing optimization
Other prior year activities
The Company also incurred $6 million of exit costs for the quarter ended October 3, 2009 for two programs: the European manufacturing optimization plan in Bremen Germany; and the supply chain rationalization in Latin America. These costs were recorded in COGS within the Europe and Latin America operating segments.
The programs were completed as of the end of 2009. Refer to page 36 of the Company’s 2009 Annual Report on Form 10-K for further information on these initiatives.
The following tables present the total exit costs for these programs for the quarter and year-to-date periods ended October 3, 2009.
Supply chain rationalization
8
Note 4 Equity
Earnings per share
Basic earnings per share is determined by dividing net income attributable to Kellogg Company by the weighted average number of common shares outstanding during the period. Diluted earnings per share is similarly determined, except that the denominator is increased to include the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued. Dilutive potential common shares consist principally of employee stock options issued by the Company, and to a lesser extent, certain contingently issuable performance shares. Basic earnings per share is reconciled to diluted earnings per share in the following table. The total number of anti-dilutive potential common shares excluded from the reconciliation were 9 million and 4 million for the quarter and year-to-date periods ended October 2, 2010, respectively, and 12 million and 20 million for the quarter and year-to-date periods ended October 3, 2009, respectively.
Quarters ended October 2, 2010 and October 3, 2009:
2010
Dilutive potential common shares
2009
Year-to-date periods ended October 2, 2010 and October 3, 2009:
During the year-to-date period ended October 2, 2010, the Company issued 0.2 million shares to employees and directors under various benefit plans and stock purchase programs, as further discussed in Note 5.
On April 23, 2010, the Company’s board of directors authorized a $2.5 billion three-year share repurchase program for 2010 through 2012. This authorization replaced the previous share buyback program which authorized stock repurchases of up to $1,113 million for 2010. During the year-to-date period ended October 2, 2010, the Company repurchased 18
9
million shares of common stock for a total of $907 million. During the year-to-date period ended October 3, 2009, the Company spent $187 million to purchase approximately 4 million shares.
Comprehensive income
Comprehensive income includes net income and all other changes in equity during a period except those resulting from investments by or distributions to shareholders. Other comprehensive income for all periods presented consists of foreign currency translation adjustments, fair value adjustments associated with cash flow hedges and adjustments for net experience losses and prior service cost related to employee benefit plans.
Pre-tax adjustments to the Company’s other comprehensive income balances related to pension and post-retirement benefits arising during the periods for net experience gain (loss) and prior service credit (costs) are summarized as follows:
Census-related valuation update
Foreign currency remeasurement
During the first quarter of 2010, the Company amended its U.S. postretirement healthcare benefit plan, which resulted in a $17 million decrease of a deferred tax asset.
10
Quarter ended October 2, 2010:
Other comprehensive income:
Foreign currency translation adjustments
Cash flow hedges:
Unrealized gain (loss) on cash flow hedges
Reclassification to net earnings
Postretirement and postemployment benefits:
Amounts arising during the period:
Net experience gain (loss)
Prior service credit (cost)
Reclassification to net earnings:
Net experience loss
Prior service cost
Total comprehensive income
Quarter ended October 3, 2009:
11
Year-to-date period ended October 2, 2010:
Year-to-date period ended October 3, 2009:
Accumulated other comprehensive income (loss) as of October 2, 2010 and January 2, 2010 consisted of the following:
Cash flow hedges—unrealized net loss
Total accumulated other comprehensive income (loss)
12
Note 5 Stock compensation
The Company uses various equity-based compensation programs to provide long-term performance incentives for its global workforce. Currently, these incentives consist principally of stock options, and to a lesser extent, executive performance shares and restricted stock grants. Additionally, the Company awards restricted stock to its non-employee directors. The interim information below should be read in conjunction with the disclosures included on pages 40 to 43 of the Company’s 2009 Annual Report in Form 10-K.
The Company classifies pre-tax stock compensation expense in selling, general and administrative expense principally within its corporate operations. For the periods presented, compensation expense for all types of equity-based programs and the related income tax benefit recognized were as follows:
Pre-tax compensation expense
Related income tax benefit
As of October 2, 2010, total stock-based compensation cost related to non-vested awards not yet recognized was $40 million and the weighted-average period over which this amount is expected to be recognized was 2 years.
Stock options
During the year-to-date periods ended October 2, 2010 and October 3, 2009, the Company granted non-qualified stock options to eligible employees as presented in the following activity tables. Terms of these grants and the Company’s methods for determining grant-date fair value of the awards were consistent with that described on pages 41 and 42 of the Company’s 2009 Annual Report on Form 10-K.
Outstanding, beginning of period
Granted
Exercised
Forfeitures and expirations
Outstanding, end of period
Exercisable, end of period
13
The weighted-average fair value of options granted was $7.90 per share for the year-to-date period ended October 2, 2010 and $6.33 per share for the year-to-date period ended October 3, 2009. The fair value was estimated using the following assumptions:
Grants within the year-to-date period ended October 2, 2010:
The total intrinsic value of options exercised was $40 million for the year-to-date period ended October 2, 2010 and $4 million for the year-to-date period ended October 3, 2009.
Performance shares
In the first quarter of 2010, the Company granted performance shares to a limited number of senior executive-level employees, which entitle these employees to receive a specified number of shares of the Company’s common stock on the vesting date, provided cumulative three-year operating profit and internal net sales growth targets are achieved.
The 2010 target grant currently corresponds to approximately 210,000 shares, with a grant-date fair value of $48 per share. The actual number of shares issued on the vesting date could range from 0 to 200% of target, depending on actual performance achieved. Based on the market price of the Company’s common stock at October 2, 2010, the maximum future value that could be awarded to employees on the vesting date for all outstanding performance share awards was as follows:
2008 Award
2009 Award
2010 Award
The 2007 performance share award, payable in stock, was settled at 150% of target in February 2010 for a total dollar equivalent of $14 million.
Note 6 Employee benefits
The Company sponsors a number of U.S. and foreign pension, other nonpension postretirement and postemployment plans to provide various benefits for its employees. These plans are described on pages 43 to 47 of the Company’s 2009 Annual Report on Form 10-K. Components of Company plan benefit expense for the periods presented are included in the tables below.
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Service cost
Interest cost
Expected return on plan assets
Amortization of unrecognized prior service cost
Recognized net loss
Total pension expense
Total postretirement benefit expense
Total postemployment benefit expense
Company contributions to employee benefit plans are summarized as follows:
Quarter ended:
October 3, 2009
Year-to-date period ended:
Full year:
Fiscal year 2010 (projected)
Fiscal year 2009 (actual)
Plan funding strategies may be modified in response to management’s evaluation of tax deductibility, market conditions, and competing investment alternatives.
During the first quarter of 2010, the Company amended its U.S. postretirement healthcare benefit plan, which resulted in a decrease of a deferred tax asset of $17 million. This impact was recorded in other comprehensive income.
15
Note 7 Income taxes
The consolidated effective income tax rate for 2010 as compared to 2009 is as follows:
The consolidated effective tax rate for the quarter ended October 2, 2010 was higher than the prior period due to the positive impact of various provision-to-return adjustments.
As of October 2, 2010, the Company classified $48 million of unrecognized tax benefits as a current liability, representing several income tax positions under examination in various jurisdictions. Management’s estimate of reasonably possible changes in unrecognized tax benefits during the next twelve months consists of the current liability balance, expected to be settled within one year, offset by $11 million of projected additions. Management is currently unaware of any issues under review that could result in significant additional payments, accruals or other material deviation in this estimate.
Following is a reconciliation of the Company’s total gross unrecognized tax benefits for the year-to-date period ended October 2, 2010; $106 million of this total represents the amount that, if recognized, would affect the Company’s effective income tax rate in future periods.
16
Tax positions related to current year:
Additions
Tax positions related to prior years:
Reductions
Settlements
The current portion of the Company’s unrecognized tax benefits is presented in the balance sheet within accrued income taxes and the amount expected to be settled after one year is recorded in other liabilities.
The Company classifies income tax-related interest and penalties as interest expense and SGA expense, respectively.
Interest expense recognized for the year-to-date period ending October 2, 2010
Interest accrued at October 2, 2010
Note 8 Derivative instruments and fair value measurements
The Company is exposed to certain market risks such as changes in interest rates, foreign currency exchange rates, and commodity prices, which exist as a part of its ongoing business operations. Management uses derivative financial and commodity instruments, including futures, options, and swaps, where appropriate, to manage these risks. Instruments used as hedges must be effective at reducing the risk associated with the exposure being hedged and must be designated as a hedge at the inception of the contract.
The Company designates derivatives as cash flow hedges, fair value hedges, net investment hedges, or other contracts used to reduce volatility in the translation of foreign currency earnings to U.S. dollars. The fair value of derivative instruments is recorded in other prepaid assets, other assets, other current liabilities or other liabilities. Gains and losses representing either hedge ineffectiveness, hedge components excluded from the assessment of effectiveness, or hedges of translational exposure are recorded in the Consolidated Statement of Income in other income (expense), net. Within the Consolidated Statement of Cash Flows, settlements of cash flow and fair value hedges are classified as an operating activity; settlements of all other derivatives are classified as a financing activity. As a matter of policy, the Company does not engage in trading or speculative hedging transactions.
Total notional amounts of the Company’s derivative instruments at October 2, 2010 and January 2, 2010 were as follows:
Foreign currency exchange contracts
Interest rate contracts
Commodity contracts
Cash flow hedges
Qualifying derivatives are accounted for as cash flow hedges when the hedged item is a forecasted transaction. Gains and losses on these instruments are recorded in other comprehensive income until the underlying transaction is recorded in earnings. When the hedged item is realized, gains or losses are reclassified from accumulated other comprehensive income (loss) (AOCI) to the Consolidated Statement of Income on the same line item as the underlying transaction.
Fair value hedges
Qualifying derivatives are accounted for as fair value hedges when the hedged item is a recognized asset, liability, or firm commitment. Gains and losses on these instruments are recorded in earnings, offsetting gains and losses on the hedged item.
17
Net investment hedges
Qualifying derivative and nonderivative financial instruments are accounted for as net investment hedges when the hedged item is a nonfunctional currency investment in a subsidiary. Gains and losses on these instruments are included in foreign currency translation adjustments in AOCI.
Other contracts
The Company also periodically enters into foreign currency forward contracts and options to reduce volatility in the translation of foreign currency earnings to U.S. dollars. Gains and losses on these instruments are recorded in other income (expense), net, generally reducing the exposure to translation volatility during a full-year period.
Foreign currency exchange risk
The Company is exposed to fluctuations in foreign currency cash flows related primarily to third-party purchases, intercompany transactions and nonfunctional currency denominated third-party debt. The Company is also exposed to fluctuations in the value of foreign currency investments in subsidiaries and cash flows related to repatriation of these investments. Additionally, the Company is exposed to volatility in the translation of foreign currency denominated earnings to U.S. dollars. Management assesses foreign currency risk based on transactional cash flows and translational volatility and enters into forward contracts, options, and currency swaps to reduce fluctuations in net long or short currency positions. Forward contracts and options are generally less than 18 months duration. Currency swap agreements are established in conjunction with the term of underlying debt issues.
For foreign currency cash flow and fair value hedges, the assessment of effectiveness is generally based on changes in spot rates. Changes in time value are reported in other income (expense), net.
Interest rate risk
The Company is exposed to interest rate volatility with regard to future issuances of fixed rate debt. The Company periodically uses interest rate swaps, including forward-starting swaps, to reduce interest rate volatility and funding costs associated with certain debt issues, and to achieve a desired proportion of variable versus fixed rate debt, based on current and projected market conditions.
Fixed-to-variable interest rate swaps are accounted for as fair value hedges and the assessment of effectiveness is based on changes in the fair value of the underlying debt, using incremental borrowing rates currently available on loans with similar terms and maturities.
Price risk
The Company is exposed to price fluctuations primarily as a result of anticipated purchases of raw and packaging materials, fuel, and energy. The Company has historically used the combination of long-term contracts with suppliers, and exchange-traded futures and option contracts to reduce price fluctuations in a desired percentage of forecasted raw material purchases over a duration of generally less than 18 months.
Commodity contracts are accounted for as cash flow hedges. The assessment of effectiveness for exchange-traded instruments is based on changes in futures prices. The assessment of effectiveness for over-the-counter transactions is based on changes in designated indices.
Credit-risk-related contingent features
Certain of the Company’s derivative instruments contain provisions requiring the Company to post collateral on those derivative instruments that are in a liability position if the Company’s credit rating falls below BB+ (S&P), or Baa1 (Moody’s). The fair value of all derivative instruments with credit-risk-related contingent features in a liability position on October 2, 2010 was $39 million. If the credit-risk-related contingent features were triggered as of October 2, 2010, the Company would be required to post collateral of $39 million. In addition, certain derivative instruments contain provisions that would be triggered in the event the Company defaults on its debt agreements. There were no collateral posting requirements as of October 2, 2010 triggered by credit-risk-related contingent features.
Fair value measurements
Following is a description of each category in the fair value hierarchy and the financial assets and liabilities of the Company that are included in each category at October 2, 2010 and January 2, 2010.
Level 1 – Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market. For the Company, level 1 financial assets and liabilities consist primarily of commodity derivative contracts.
18
Level 2 – Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability.
For the Company, level 2 financial assets and liabilities consist of interest rate swaps and over-the-counter commodity and currency contracts.
The Company’s calculation of the fair value of interest rate swaps is derived from a discounted cash flow analysis based on the terms of the contract and the interest rate curve. Commodity derivatives are valued using an income approach based on the commodity index prices less the contract rate multiplied by the notional amount. Foreign currency contracts are valued using an income approach based on forward rates less the contract rate multiplied by the notional amount. The Company’s calculation of the fair value of level 2 financial assets and liabilities takes into consideration the risk of nonperformance, including counterparty credit risk.
Level 3 – Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability. The Company did not have any level 3 financial assets or liabilities as of October 2, 2010 or January 2, 2010.
Fair values of these assets and liabilities in the Consolidated Balance Sheet measured at fair value on a recurring basis consists of derivatives designated as hedging instruments, and as of October 2, 2010 and January 2, 2010 were as follows:
January 2,
Assets:
Foreign currency exchange contracts:
Interest rate contracts:
Commodity contracts:
Liabilities:
Total liabilities
19
The effect of derivative instruments on the Consolidated Statement of Income for the quarters ended October 2, 2010 and October 3, 2009 were as follows:
Gain (loss)
recognized inAOCI
Location of
gain (loss)reclassifiedfrom AOCI
20
The effect of derivative instruments on the Consolidated Statement of Income for the year-to-date periods ended October 2, 2010 and October 3, 2009 were as follows:
Derivatives in fair value hedging
relationships (millions)
Gain (loss) recognized
in income
Derivatives in cash flow hedging
Gain (loss)recognized in
AOCI
Financial instruments
The carrying values of the Company’s short-term items, including cash, cash equivalents, accounts receivable, accounts payable and notes payable approximate fair value. The fair value of the Company’s long-term debt is calculated based on broker quotes and was as follows at October 2, 2010:
Credit risk concentration
The Company is exposed to credit loss in the event of nonperformance by counterparties on derivative financial and commodity contracts. Management believes a concentration of credit risk with respect to derivative counterparties is
21
limited due to the credit ratings of the counterparties and the use of master netting and reciprocal collateralization agreements.
Master netting agreements apply in situations where the Company executes multiple contracts with the same counterparty. Certain counterparties represent a concentration of credit risk to the Company. If those counterparties fail to perform according to the terms of derivative contracts, this would result in a loss to the Company of $57 million as of October 2, 2010.
For certain derivative contracts, reciprocal collateralization agreements with counterparties call for the posting of collateral in the form of cash, treasury securities or letters of credit if a fair value loss position to the Company or our counterparties exceeds a certain amount. There were no collateral balance requirements at October 2, 2010.
Management believes concentrations of credit risk with respect to accounts receivable is limited due to the generally high credit quality of the Company’s major customers, as well as the large number and geographic dispersion of smaller customers. However, the Company conducts a disproportionate amount of business with a small number of large multinational grocery retailers, with the five largest accounts encompassing approximately 28% of consolidated trade receivables at October 2, 2010.
Note 9 Voluntary product recall
On June 25, 2010, the Company announced a voluntary recall of select packages of Kellogg’s cereal in the U.S. due to an odor from waxy resins found in the package liner. Estimated customer returns and consumer rebates were recorded as a reduction of net sales; costs associated with returned product and the disposal and write-off of inventory were recorded as COGS; and other recall costs were recorded as SGA expenses. During the quarter, the Company refined the estimated costs of the recall, which resulted in a reduction of $1 million, for a year-to-date expense through October 2, 2010 of $47 million, or $.09 per share on a diluted basis. In addition to the costs of the voluntary recall, the Company also lost sales of the impacted products in the second and third quarters of 2010.
Note 10 Operating segments
Kellogg Company is the world’s leading producer of cereal and a leading producer of convenience foods, including cookies, crackers, toaster pastries, cereal bars, fruit snacks, frozen waffles, and veggie foods. Kellogg products are manufactured and marketed globally. Principal markets for these products include the United States and United Kingdom. The Company currently manages its operations in four geographic operating segments, consisting of North America and the three International operating segments of Europe, Latin America, and Asia Pacific.
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October 2,
Latin America
Consolidated
Segment operating profit
Corporate
23
PART I—FINANCIAL INFORMATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of operations
Overview
Kellogg Company is the world’s leading producer of cereal and a leading producer of convenience foods, including cookies, crackers, toaster pastries, cereal bars, fruit snacks, frozen waffles and veggie foods. Kellogg products are manufactured and marketed globally. We currently manage our operations in four geographic operating segments, consisting of North America and the three International operating segments of Europe, Latin America and Asia Pacific.
We manage our Company for sustainable performance defined by our long-term annual growth targets. These targets are low single-digit (1 to 3%) for internal net sales, mid single-digit (4 to 6%) for internal operating profit, and high single-digit (7 to 9%) for net earnings per share on a currency neutral basis. Internal net sales and internal operating profit exclude the impact of foreign currency translation, acquisitions, dispositions and shipping day differences. See the “Foreign currency translation” section for an explanation of management’s definition of currency neutral.
For the quarter ended October 2, 2010, our reported net sales decreased 4% compared to the same period last year; internal net sales decreased 2%. Consolidated operating profit decreased 5%, while internal operating profit decreased 3%. Diluted earnings per share (EPS) declined 4% to $0.90, compared to $0.94 in the comparable prior period. EPS on a currency neutral basis was down 2%.
On a year-to-date basis, our reported net sales were down 1%, with internal net sales down 2%. Consolidated operating profit increased 1% on a reported basis and 1% on an internal basis. Diluted EPS was up 3%, at $2.78, compared to $2.70 in the prior year. EPS on a currency neutral basis was up 4%.
We have lowered our guidance for the full year to reflect weaker performance in some of our core cereal markets, continued competitive intensity and the impact of the voluntary cereal recall in the U.S. which is discussed further in the “Voluntary product recall” section. For the full year, we now expect our internal net sales to be down approximately 1%. Internal operating profit is expected to be approximately flat compared to the prior year and currency neutral earnings per share is expected to grow 4 to 5%.
For 2011, we expect to grow internal net sales by low single-digits. Internal operating profit is expected to be flat to down 2%. EPS on a currency-neutral basis is expected to grow low single-digits.
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Net sales and operating profit
The following table provides an analysis of net sales and operating profit performance for the third quarter of 2010 versus 2009:
2010 net sales
2009 net sales
% change — 2010 vs. 2009:
Volume (tonnage) (b)
Pricing/mix
Subtotal — internal business
Foreign currency impact
Total change
2010 operating profit
2009 operating profit
Internal business
Our consolidated net sales were down 4% reflecting weakness in our core cereal markets, competitive pressures, and the impact of the second quarter 2010 voluntary recall of select packages of breakfast cereals. Reported net sales was positively impacted by currency, resulting in an internal net sales decline of 2%.
Internal net sales for our North America operating segment declined 3%. North America has three product groups: retail cereal, retail snacks and frozen and specialty channels. Retail cereal’s internal net sales declined by 6% in the quarter. Heavy promotional pricing drove deflation into the category. Despite the deflation, the cereal category continued to be weak and we experienced a decrease in consumption. Consumer consumption impacts purchases by retailers, who are our primary customers. Our consumption was negatively impacted by the ongoing effect of the voluntary cereal recall that occurred in the second quarter of 2010. The brands involved in the recall, our kids’ brands, were the cornerstone of our back-to-school promotions in the third quarter. While we tried to re-work our promotional plans, our competitors were more aggressive than we expected and benefited from our supply issues resulting from the recall. We have also been impacted by less support from non-measured channels this year.
The retail snack product group (cookies, crackers, toaster pastries, cereal bars, and fruit snacks) grew by less than 1%. The modest growth was driven by Pop-Tarts and strong wholesome snack bar sales including our bar innovations such as FiberPlus Chocolate Peanut Butter and Special K Fruit Crisps. The good performance in wholesome snacks was masked by weaker performance in cookies.
Internal net sales in the frozen and specialty channels (frozen foods, food service and vending) decreased by 5%. In our waffle business, our customers are not resetting their shelves as quickly as we had expected and the pace of consumers’ response is slower than projected.
Our International operating segments’ internal net sales were down 2% compared to the prior year. Europe’s internal net sales declined 5% in the third quarter. We are seeing price deflation in many food categories across Europe, especially in the U.K. Continued weakness in the Russia snack business drove lower volumes and contributed to Europe’s lower top line results. Latin America’s internal net sales growth was up 5%, on top of last year’s strong 9% growth. Cereal growth across the region mitigated a decline in snacks. Our decline in snacks is largely driven by Venezuela where we import products from Mexico. The imports have been impacted by exchange rate controls in Venezuela. Internal net sales in Asia Pacific grew 2% driven by strong performance across Asia and South Africa. This was muted by a decline in Australia where the cereal category is facing price deflation.
Consolidated operating profit declined by 5% on an as reported basis and by 3% on an internal basis, when excluding the impact of foreign currency translation. Softness in sales, increased investment in advertising, a decrease in volume going
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through our manufacturing plants and increased costs more than offset the benefit of lower incentive compensation expense, resulting in an overall decline in operating profit. Incentive compensation is based upon the Company’s actual results compared to our targets. Given results are lower than expected, incentive compensation decreased in the third quarter, including a year-to-date adjustment.
Internal operating profit in North America decreased by 3%, Europe’s grew by 2%, Latin America’s declined by 18% and Asia Pacific’s declined by 17%. North America’s operating profit was negatively impacted by increased promotional activity in the cereal category, the ongoing impact of the second quarter 2010 voluntary recall as well as a slower than anticipated rebound in our waffle business. In addition, higher supply chain costs and increased advertising contributed to the decline. This was partially offset by lower up-front costs and lower incentive compensation expense. Europe’s increase in internal operating profit was attributable to supply chain efficiencies, lower up-front costs and a decrease in incentive compensation expense. Latin America’s decline was due primarily to increased commodity costs, incremental operating and distribution costs in Mexico as well as overhead inflation and a modest increase in advertising. Asia Pacific’s decline was due to increased investments in advertising and promotion. Corporate benefited from lower incentive compensation expense.
The following tables provide analysis of our net sales to operating performance for the year-to-date periods of 2010 compared to 2009. Our weak top-line growth in the second and third quarter of 2010 has more than offset our first quarter increase, resulting in a decrease in year-to-date internal net sales of 1%. Internal operating profit is up 1% compared to the prior year due to lower up-front costs and reduced incentive compensation expense which more than offset the softness in the business.
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Margin performance
Margin performance for the third quarter and year-to-date periods of 2010 versus 2009 is as follows:
Gross margin (a)
SGA% (b)
Operating margin
As illustrated in the preceding table, our consolidated gross margin decreased by 50 basis points in the quarter due primarily to lower volume. While we are achieving savings from our cost reduction initiatives, we continue to experience inflationary cost pressures for fuel, energy, commodities and employee benefits. Our selling, general and administrative (SGA) expenses were down in the quarter due a reduction in incentive compensation expense.
On a year-to-date basis, gross margin was flat compared to the prior year comparable period. We expect our full year gross margin to be flat or down slightly. Our SGA expenses on a year-to-date basis were down due to the third quarter adjustment for lower incentive compensation expense.
Foreign currency translation
The reporting currency for our financial statements is the U.S. dollar. Certain of our assets, liabilities, expenses and revenues are denominated in currencies other than the U.S. dollar, primarily in the Euro, British pound, Mexican peso, Australian dollar and Canadian dollar. To prepare our consolidated financial statements, we must translate those assets, liabilities, expenses and revenues into U.S. dollars at the applicable exchange rates. As a result, increases and decreases in the value of the U.S. dollar against these other currencies will affect the amount of these items in our consolidated financial statements, even if their value has not changed in their original currency. This could have significant impact on our results if such increase or decrease in the value of the U.S. dollar is substantial.
Volatility in the foreign exchange markets has limited our ability to forecast future U.S. dollar reported earnings. As such, we are measuring diluted earnings per share growth and providing guidance on future earnings on a currency neutral basis, assuming earnings are translated at the prior year’s exchange rates. This non-GAAP financial measure is being used to focus management and investors on local currency business results, thereby providing visibility to the underlying trends of the Company. Management believes that excluding the impact of foreign currency from EPS provides a useful measurement of comparability given the volatility in foreign exchange markets.
Diluted net earnings per share (EPS)
Translational impact (a)
Currency neutral EPS
Currency neutral EPS growth (b)
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Voluntary product recall
On June 25, 2010, we announced a voluntary recall of select packages of Kellogg’s cereal in the U.S. due to an odor from waxy resins found in the package liner. Estimated customer returns and consumer rebates were recorded as a reduction of net sales; costs associated with returned product and the disposal and write-off of inventory were recorded as cost of goods sold (COGS); and other recall costs were recorded as selling, general and administrative expenses. During the quarter, we refined the estimated costs of the recall, which resulted in a reduction of $1 million, for a year-to-date expense through October 2, 2010 of $47 million, or $.09 per share on a diluted basis. In addition to the costs of the voluntary recall, we also lost sales of the impacted products in the second and third quarters of 2010.
Other cost reduction initiatives
We view our continued spending on cost reduction initiatives as part of our ongoing operating principles to provide greater visibility in achieving our long-term profit growth targets. Initiatives undertaken are currently expected to recover cash implementation costs within a five-year period of completion. Each cost reduction initiative is normally up to three years in duration. Upon completion (or as each major stage is completed in the case of multi-year programs), the project begins to deliver cash savings and/or reduced depreciation. Certain of these initiatives represent exit or disposal plans for which material charges will be incurred. See further discussion in Note 3. We include these charges in our measure of operating segment profitability. In 2009, we announced our intention to achieve $1 billion plus of annual cost savings in three years (beginning in 2012). These initiatives are integral to meeting our $1 billion plus savings challenge.
We incurred costs related to our cost reduction initiatives which do not qualify as exit costs under generally accepted accounting principles in the United States. These represent cash costs for consulting and other charges for our COGS and selling, general and administrative (SGA) programs.
Costs incurred during the quarter and year-to-date period ended October 2, 2010 were as follows:
Asia Pacific
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Total program costs incurred to date were as follows:
The additional cost and cash outlay in 2010 for these programs, excluding exit costs, is estimated to be $10 to $15 million. The projects are expected to be substantially complete by the end of 2010.
SAP reimplementation
We are reimplementing SAP, which will result in process and productivity improvements. The program is expected to require an investment of approximately $150 million, the majority of which is capital related. In addition to internal resources, we are incurring incremental consulting costs associated with the reimplementation, which will take effect from 2011 through 2013.
In the third quarter of 2010, we incurred approximately $2 million of consulting costs associated with this program, for a year to date total of $6 million.
Prior year activities
During the third quarter of October 3, 2009, we incurred $15 million of consulting and other costs in connection with our COGS and SGA programs. Costs were recorded in the following operating segments for the quarter and year-to-date period ended October 3, 2009.
For the quarter and year-to-date period ended October 2, 2010, interest expense was $62 million and $188 million, respectively, as compared to the quarter and year-to-date period ended October 3, 2009 with interest expense of $65 million and $199 million, respectively.
For the full year 2010, we expect gross interest expense to be approximately $250 million, compared to 2009’s full year amount of $295 million. The forecasted decline is driven primarily by costs of the bond tender executed in 2009.
The consolidated effective income tax rate was 30% for the quarter ended October 2, 2010, as compared to 27% for the comparable quarter of 2009. The year-to-date consolidated effective tax rate for 2010 was 29% consistent with 29% in the previous year.
For the full year 2010, we currently expect the consolidated effective income tax rate to be approximately 29%. We estimate 2011’s effective rate to be approximately 30%. Our estimate of the effective income tax rate for any period is highly influenced by country mix of earnings, changes in statutory tax rates, timing of implementation of tax planning initiatives, and developments which affect our evaluation of uncertain tax positions.
Liquidity and capital resources
Our principal source of liquidity is operating cash flows supplemented by borrowings for major acquisitions and other significant transactions. Our cash-generating capability is one of our fundamental strengths and provides us with substantial financial flexibility in meeting operating and investing needs.
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The principal source of our operating cash flow is net earnings, meaning cash receipts from the sale of our products, net of costs to manufacture and market our products. Our cash conversion cycle (defined as days of inventory and trade receivables outstanding less days of trade payables outstanding, based on a trailing 12 month average) was approximately 22 days during the 12 month periods ended October 2, 2010 and October 3, 2009. During the 12 month period ended October 2, 2010, the unfavorable impact on the cash conversion cycle resulting from higher days of inventory outstanding was more than offset by an increase in days of trade payables outstanding.
Items in net income not requiring (providing) cash:
Net Income after non-cash items
Core working capital (a)
Other working capital
Lower operating cash flow in 2010 was the result of an unfavorable year-over-year variance in other working capital, which more than offset a favorable variance relating to core working capital.
The unfavorable variance in other working capital in 2010 primarily reflected lower salary and wage accruals due to the decrease in incentive compensation and higher payments for advertising. An increase in cash paid for the settlement of hedge contracts in 2010 versus the prior year period was also a factor.
Cash flows associated with core working capital in 2010 were favorable compared with the same period in 2009, largely the result of improvements in trade payables and receivables. We continue to manage core working capital by focusing on the timely collection of trade receivables, extending terms on accounts payable and careful monitoring of inventory.
Our pension and other postretirement benefit plan contributions amounted to $45 million and $93 million for the year-to-date periods ended October 2, 2010 and October 3, 2009, respectively. For full year 2010, we currently expect that our contribution to pension and other postretirement plans will total approximately $615 million, including a voluntary contribution of $500 million, net of tax. Plan funding strategies may be modified in response to our evaluation of tax deductibility, market conditions and competing investment alternatives.
We measure cash flow as net cash provided by operating activities reduced by expenditures for property additions. We use this non-GAAP financial measure of cash flow to focus management and investors on the amount of cash available for debt repayment, dividend distributions, acquisition opportunities, and share repurchases. Our cash flow metric is reconciled to the most comparable GAAP measure, as follows:
Cash flow
For 2010, we are projecting cash flow (as defined) within a range of $450 to $500 million. This projection has been lowered to reflect our voluntary pension and post-retirement benefit plan contributions, net of tax.
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Our net cash used in investing activities for 2010 year-to-date amounted to $250 million, on par with cash used of $251 million for the same period in 2009.
For fiscal year 2010, we project that capital spending will total approximately $470 million. This reflects investment in our information technology infrastructure as we reinstall and upgrade our SAP platform as well as investments in our supply chain.
For fiscal year 2011, we expect capital spending to be 4% of net sales, which is at the high end of our range of 3 to 4 percent of net sales.
Our net cash used in financing activities for the year-to-date period ended October 2, 2010 amounted to $611 million compared with $724 million for the comparable period in 2009.
We had positive cash flows associated with the issuance of commercial paper in 2010, while we reduced commercial paper outstanding during the first nine months of 2009, primarily through the use of $745 million proceeds associated with our May 2009 issuance of $750 million in long-term debt.
Cash inflows from net issuances of common stock amounted to $178 million in the first nine months of 2010 compared with $34 million during the same period in 2009, with the increase attributable to a higher level of stock option exercise activity in 2010.
During the year-to-date period ended October 2, 2010, we repurchased approximately 18 million shares of our common stock for a total of $907 million. During full year 2010, we expect repurchases of our common stock to be up to $1.2 billion. Actual 2010 repurchases could be different from our current projections, as influenced by factors such as the impact of changes in our stock price and other competing priorities. During the year-to-date period ended October 3, 2009, we repurchased approximately 4 million shares of our common stock for a total of $187 million. The 2010 repurchase activity falls under a program approved in April 2010. On April 23, 2010, our board of directors authorized a $2.5 billion three-year share repurchase program for 2010 through 2012. This authorization replaced the previous share buyback program which authorized stock repurchases of up to $1,113 million for 2010.
During 2011 and 2012, we plan to execute the remaining repurchases under the 2010 authorization. Actual repurchases could be different from our current projections, as influenced by factors such as the impact of changes in our stock price and other competing priorities.
We paid cash dividends of $435 million and $403 million during the year-to-date periods ended October 2, 2010 and October 3, 2009, respectively. In October 2010, the board of directors declared a dividend of $0.405 per common share, payable on December 15, 2010 to shareholders of record at close of business on December 1, 2010.
We continue to believe that we will be able to meet our interest and principal repayment obligations and maintain our debt covenants for the foreseeable future.
We plan to refinance our $946 million of debt maturing in March 2011 prior to its maturity. We expect our access to public debt and commercial paper markets, along with operating cash flows, to be adequate to meet future operating, investing and financing needs, including the pursuit of selected bolt-on acquisitions.
There can be no assurance that volatility and/or disruption in the global capital and credit markets will not impair our ability to access these markets on terms acceptable to us, or at all.
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Forward-looking statements
This Management’s Discussion and Analysis contains “forward-looking statements” with projections concerning, among other things, our strategy, financial principles, and plans; initiatives, improvements and growth; sales, gross margins, advertising, promotion, merchandising, brand building, operating profit, and earnings per share; innovation; investments; capital expenditures; asset write-offs and expenditures and costs related to productivity or efficiency initiatives; the impact of accounting changes and significant accounting estimates; our ability to meet interest and debt principal repayment obligations; minimum contractual obligations; future common stock repurchases or debt reduction; effective income tax rate; cash flow and core working capital improvements; interest expense; commodity, and energy prices; and employee benefit plan costs and funding. Forward-looking statements include predictions of future results or activities and may contain the words “expect,” “believe,” “will,” “will deliver,” “anticipate,” “project,” “should,” or words or phrases of similar meaning. Our actual results or activities may differ materially from these predictions. Our future results could be affected by a variety of factors, including:
the impact of competitive conditions;
the effectiveness of pricing, advertising, and promotional programs;
the success of innovation, renovation and new product introductions;
the recoverability of the carrying value of goodwill and other intangibles;
the success of productivity improvements and business transitions;
commodity and energy prices;
labor costs;
disruptions or inefficiencies in supply chain;
the availability of and interest rates on short-term and long-term financing;
actual market performance of benefit plan trust investments;
the levels of spending on systems initiatives, properties, business opportunities, integration of acquired businesses, and other general and administrative costs;
changes in consumer behavior and preferences;
the effect of U.S. and foreign economic conditions on items such as interest rates, statutory tax rates, currency conversion and availability;
legal and regulatory factors including changes in advertising and labeling laws and regulations;
the ultimate impact of product recalls;
business disruption or other losses from war, terrorist acts, or political unrest; and,
the risks and uncertainties described herein under Part II, Item 1A.
Forward-looking statements speak only as of the date they were made, and we undertake no obligation to publicly update them.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Our Company is exposed to certain market risks, which exist as a part of our ongoing business operations. We use derivative financial and commodity instruments, where appropriate, to manage these risks. Refer to Note 8 within Notes to Consolidated Financial Statements for further information on our derivative financial and commodity instruments.
Refer to disclosures contained on pages 24-26 of our 2009 Annual Report on Form 10-K. Other than changes noted here, there have been no material changes in the Company’s market risk as of October 2, 2010.
The total notional amount of commodity derivative instruments at October 2, 2010 was $207 million, representing a settlement obligation of $38 million. The total notional amount of commodity derivative instruments at January 2, 2010 was $213 million, representing a settlement obligation of $16 million. Assuming an unfavorable 10% change in period-end commodity prices, the settlement obligation would have increased by $16 million and $18 million as of October 2, 2010 and January 2, 2010, respectively. Those unfavorable changes would generally have been offset by a reduction in the cost of the underlying commodity purchases.
The total notional amount of foreign currency derivative instruments at October 2, 2010 was $1,206 million, representing a settlement receivable of $21 million. Assuming an unfavorable 10% change in period-end exchange rates, the settlement receivable would have decreased by $121 million, generally offset by favorable changes in the values of the underlying exposures. The total notional amount of foreign currency derivative instruments at January 2, 2010 was $1,588 million, representing a settlement obligation of $24 million. Assuming an unfavorable 10% change in period-end exchange rates, the settlement obligation would have increased by $159 million, generally offset by favorable changes in the values of the underlying exposures.
Venezuela was designated as a highly inflationary economy as of the beginning of our 2010 fiscal year. Gains and losses resulting from the translation of the financial statements of subsidiaries operating in highly inflationary economies are recorded in earnings. As of the end of our 2009 fiscal year, we used the parallel rate to translate our Venezuelan subsidiary’s financial statements to U.S. dollars. In May 2010, the Venezuelan government effectively eliminated the parallel market. In June, several large Venezuelan commercial banks began operating the Transaction System for Foreign Currency Denominated Securities (SITME). We intend to use SITME to settle non-functional currency denominated assets and liabilities. Accordingly, we are using the SITME rate at October 2, 2010 to translate our Venezuelan subsidiary’s financial statements to U.S. dollars. During the second quarter of 2010, we recorded an $8 million foreign exchange gain in other income (expense), net, associated with the translation of our subsidiary’s financials into U.S. dollars. On a year-to-date basis we recorded a $4 million foreign exchange gain in other income (expense), net. On a consolidated basis, Venezuela represents only 1% to 2% of our business; therefore, any ongoing impact is expected to be immaterial.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure under Rules 13a-15(e) and 15d-15(e). Disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, rather than absolute, assurance of achieving the desired control objectives.
As of October 2, 2010, we carried out an evaluation under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.
During the last fiscal quarter, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II — OTHER INFORMATION
Item 1A. Risk Factors
There have been no material changes in our risk factors from those disclosed in Part I, Item 1A to our Annual Report on Form 10-K for the fiscal year ended January 2, 2010. The risk factors disclosed under this Part II, Item 1A and in Part I, Item 1A to our Annual report on Form 10-K for the fiscal year ended January 2, 2010, in addition to the other information set forth in this Report, could materially affect our business, financial condition, or results. Additional risks and uncertainties not currently known to us or that we deem to be immaterial could also materially adversely affect our business, financial condition, or results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Issuer Purchases of Equity Securities
Month #1:
7/4/10 -7/31/10
Month #2:
8/1/10 - 8/28/10
Month #3:
8/29/10 - 10/2/10
On April 23, 2010, our board of directors authorized a $2.5 billion three-year share repurchase program for 2010 through 2012. This authorization replaced the previous share buyback program which authorized stock repurchases of up to $1,113 million for 2010. During the year-to-date period ended October 2, 2010, we repurchased 18 million shares of our common stock for a total of $907 million. The 2010 repurchase activity falls under the program approved in April 2010.
Item 6. Exhibits
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
/s/ R. L. Dissinger
Principal Financial Officer;
Senior Vice President and Chief Financial Officer
/s/ A. R. Andrews
Principal Accounting Officer;
Vice President — Corporate Controller
Date: November 5, 2010
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EXHIBIT INDEX
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